Has the carnage of Brexit made markets immune from shock?

22nd March 2017

It has been a year since the Times talked to Andy Bell, founder of stock broker AJ Bell Securities, a major financial services employer in Tunbridge Wells. We sat down together as part of our popular Market Watch series. Back then, it was China that was rattling the markets. Many things have changed since then.

THAT Britain would be about to negotiate its exit from the European Union by triggering article 50 almost exactly a year since was a hypothetical thought experiment in early 2016 when we interviewed Andy Bell

David Cameron was attempting to renegotiation of Britain’s membership of the EU and the general outlook was that, despite winning very few concessions, the Remain vote would win come June.

Likewise, it would be months before Donald Trump was to be selected as the Republican candidate and even many of those who thought this could happen would have scoffed at the idea of him eventually taking up residence in the White House. So farfetched did the idea seem, that when the original Market Watch interview was taking place this outcome was not discussed at all.

A lot has changed since then, and previous assumptions have been turned on their heads.

Few industries are more influenced by human sentiment than those of finance. And in particular those which make their money from the world’s stock markets.

“We have had some encouraging months”

Having gown his company from a small two-man operation in 1995 to one which now manages £31.8 billion of assets, Mr Bell knows the industry inside out and even he has been surprised by how well the market has fared since June.

“Considering the past year we have had both the stock market and the economy have held up better than expected.

“The stock market is up around 16 per cent since the vote to leave and we have had some encouraging months.”

However, Mr Bell warned against getting complacent: “People must remember we have yet to start the exiting stage and we have two more years of uncertainty ahead.”

One of the main reasons why the economy has remained so buoyant is because the underlying fundamentals remain strong and the fall in the pound has acted as a ‘shock absorber’.

Sterling’s fall is beneficial for the FTSE 100 index as two thirds of earnings are from overseas and this is helping to increase the value of those companies which are listed, he explained.

He added it was a ‘possibility’ that in time this will have the desired effect of ‘rebalancing’ the real economy, but said it was necessary to keep an eye on the downsides, such as increasing inflation stifling wage growth.

Another factor behind the bullish sentiment in equity markets is Donald Trump, even though Mr Bell says in reality the new President has ‘not really done a lot, yet’ and is effectively accelerating trends which were already there. Trump will also face challenges getting his programme through congress and the Supreme Court, Mr Bell said.

But pledges on deregulating the economy, tax cuts and increased infrastructure spending are helping to drive markets higher he adds.

He also thinks markets have become rather immune to shock.

“It was absolute carnage in the hours after the Brexit vote. The market effectively shut down. But it recovered very quickly and by the time it got to Trump’s election two thirds of trades were those wanting to buy.”

For the foreseeable future, when it comes to the main indices, a ‘substantial’ amount of activity will be dictated by what happens in the US, Mr Bell believes.

These rising stock markets and robust transaction volumes are certainly good for business at AJ Bell, but its founder said he will take ‘nothing for granted’, adding: “Domestically the economic outlook is reasonably stable but my instinct is that volatility will return.”

It is against this domestic backdrop that Chancellor Philip Hammond produced what was meant to be the UK’s last spring budget, pledging to have enough ‘gas in the tank’ to help weather what could potentially be a turbulent Brexit process.

Mr Bell was relieved that the budget was ‘incredibly light’, as large budgets are often full of regulation that is bad for business and makes the system more complex. Most of the policy changes had been announced in previous budgets.

He is also ‘delighted’ that there was no more news on pension tax relief or schemes that make ISAs more complex.

“I think it is ridiculous to try and tie the Prime Minister’s hands behind her back”

And on the issue of getting on with Brexit, Mr Bell admits he had a tortuous decision to make during the run up to the referendum.

Having said one year ago that if he was thinking in terms of ‘purely selfish reasons’ he would vote to leave, he also said that upon reflection he would have to think of his friends who’s industries may well be ‘decimated’ by leaving the EU.

Mr Bell confides that as the referendum drew closer he did indeed start to worry about the impact of leaving and stepped away from a position of voting for it.

However, now the deed is done he wants the Government to get on with it.

“I think it is ridiculous to try and tie the Prime Minister’s hands behind her back. We have to be prepared to walk away. Anyone who has ever done high level negotiations knows you cannot do it in public.

“I am not in the camp that wants to re-run the referendum. We live in a democracy and now we need to get on with it.”